CEO Pay vs Worker Pay

March 4, 2017

Is there a causal connection between the compensation paid to Chief Executive Officers and the wages paid to workers? At first glance, the numbers seem to suggest a correlation. Between 1978 and 2013, the inflation-adjusted compensation paid to Chief Executive Officers of major US corporations increased 973%, while average worker salaries increased only 10.2%. Until the 1980s the average CEO made about 30 times the median salary of his or her employees. Now the average CEO of a Standard & Poor’s 500 company makes $13.8 million, approximately 204 times the median salary of his or her employees.

Instead of flowing to workers, money appears to be cascading into the wallets of CEOs. “[I]n recent decades, corporate CEOs have been taking a greater share of the economic pie,” says the AFL-CIO, “while workers’ wages have stagnated.”

Are they on to something? If CEOs were paid less, would more money be available for workers?

Actually, no. Even if the CEO of every S&P 500 company agreed to forgo a salary — instead of making millions of dollars, each agreed to work for free – the impact on workers’ wages would be negligible.

S&P 500 companies employ 27 million workers, an average of 54,000 per company. If the average CEO salary of $13.8 million was spread among the employees, the hourly wage of each worker would increase . . . 12 cents. About $4.91 a week, a mere $255.56 a year.

Clearly, CEO salaries are not depressing workers’ wages.

Of course, there may be other reasons to object to high CEO-to-worker pay ratios. Such disparities may, for one, hurt worker morale. Peter Drucker, management consultant and writer, said “I have often advised managers that a 20-to-1 salary ratio is the limit beyond which they cannot go if they don’t want resentment and falling morale to hit their companies.”

Yet the law of supply and demand is a stubborn thing. Running a major company requires an extraordinary breadth of knowledge, experience, and skills, and competition is fierce among companies vying for competent CEOs. Even the famously “progressive” Ben and Jerry’s had problems keeping CEO pay within sight of worker pay. In 1978, Ben and Jerry’s official policy was to pay the CEO no more than 5 times the pay of the lowest-paid worker. In 1994, that 5-to-1 ratio was increased to 7-to-1. Between 1994 and 2000, the ratio was gradually increased to 17-to-1. After the company was purchased by Unilever in 2000, the salary of the CEO was no longer made public.